Hard bargain for soft GST rates

The finance ministry will hold talks with state governments to fix a moderate GST rate of 16-18 per cent even as the Lok Sabha deliberates on the passage of the controversial constitution amendment bill on the proposed revenue regime this week.

By Jayanta Roy Chowdhury
  • Published 4.05.15
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New Delhi, May 3: The finance ministry will hold talks with state governments to fix a moderate GST rate of 16-18 per cent even as the Lok Sabha deliberates on the passage of the controversial constitution amendment bill on the proposed revenue regime this week.

Some state finance ministers had suggested a revenue neutral rate of 25-27 per cent as GST (goods & services tax). However, officials said such a high rate would raise prices, kill industry and shrink the economy, besides leading to high levels of tax avoidance.

"The whole idea of GST is to have a reasonable rate to encourage trade and industry and not to slap a high rate," said top officials.

Globally, the average GST rate is 16.4 per cent. It is 8.5 per cent in Southeast Asia, 19.5 per cent in the European Union, 10.8 per cent in the Asia-Pacific and 14.2 per cent in Latin America.

Finance minister Arun Jaitley is trying to get the states to see reason in accepting GST and a lower tax rate.

Officials said they were currently preparing presentations for states to get them on board.

The officials said it would be an uphill task but one which had to be done if states wanted to meet the twin objective of giving industry a fillip and raising their own earnings. It is estimated at moderate GST rates, the economy could grow 1.5-2 per cent as a host of contentious taxes would be eliminated and bureaucratic hurdle to the movement of goods curbed.

A report prepared by the World Bank said bureaucracy related to tax collection at state borders is a big reason why India's long-distance truckers are parked 60 per cent of the time.

The introduction of VAT at the beginning of the last decade had seen the economy growing at a faster rate along with state tax revenues. For instance, Bengal's revenue had risen 31.3 per cent after implementing VAT; Haryana's revenue rose 17.9 per cent; while that of Himachal Pradesh grew 28 per cent.

India's tax base is a meagre 10 per cent of its gross domestic product. In a country of more than 1.2 billion people, only about 35 million pay income tax. One of the best ways to raise this figure is to lower taxes to persuade more people to come clean rather than intimidate them into becoming evaders by raising taxes, officials said.

Already, the hike in the service tax rate in the budget to 14 per cent from 12.36 per cent is threatening a situation where the authorities may fail to meet the targets from this segment. If it is raised further because of high GST, it could hit the service sector, which contributes about 57 per cent to GDP. While growth in service tax collections stood at over 30 per cent in 2014-15, it was just above 15 per cent in the year gone by.

Officials pointed out that raising GST and with it the service tax to 25 per cent would simply "kill the service sector growth and may even result in its shrinking ... it would be like killing the goose even before it could hatch ."

Officials said they had initially worked with the assumption that the GST rate could be as low as 12 per cent - with 5 per cent for the Centre and 7 per cent for states.

"The fact that the Indian economy is still sluggish has made state governments squeamish about taking a leap and depending on lower taxes yielding higher revenue returns from increased trade," said officials. With time and objections from the states they had reworked their figures upwards but too steep a figure could put GST on the back-burner all together.

The government has to get the approval of 29 states for the tax reform to pass through.

The government hopes the Lok Sabha will vote on the constitution amendment bill this week, after which the Upper House will have to pass it. The states get to vote on the bill after that. While passing the bill in the Lower House should not pose a problem for the Narendra Modi-government with more than two-thirds majority in the House, Opposition parties which have a majority in the Rajya Sabha could create complications.